Internet caucus taking a look at internet privacy and personal data protection. The chair of the Federal Reserve, janet yellen, testified on the u. S. Economy and Monetary Policy appearing before the House Financial Services committee on wednesday for about three hours. The committee will come to order. Without objection the chair is authorized to suggest a recess for the committee at any time. This is the annual testimony on the Federal Reserves supervision and regulation of the Financial System. I now recognize myself for three minutes to give an opening statement. The dodd frank act requires the Federal Reserves vice chair of supervision to testify before our Committee Twice a year regarding the supervision and regulation of Financial Institutions. Regrettably, five years after the passage of dodd frank, no such person exists. President obama has been unwilling or unable to follow the law in a point at vice chair. We can no longer wait for the president to do his job so we can be allowed to do ours. Thus chairman yellen appears before us today in substitution. As we know, dodd frank rewarded the Federal Reserve with broad, new, sweeping regulatory powers despite its contributions to the last financial crisis. Under the dodd frank, the fed can now functionally control every major corner of the Financial Services sector of our economy, separate and apart from its traditional Monetary Policy authority. Su disturbingly, the fed does so that is neither transparent or obvious to the authority. They are not able to shield their regulatory activities by improperly cloaking them behind its traditional Monetary Policy independence. What is clear is despite the largest monetary stimulus in our nations history, in seven years of near sfwlezero Interest Rate middle income families are not getting ahead and are falling further behind. Gdp growth is coming in at an anemic 75 . Our economy has limped along at about half the postwar average. That means every man, woman and child is a thousand dollars poorer than they should be, and millions could be fully employed when they are not. Capital that could fuel robust Economic Growth instead remains sidelined due to a regulatory tsunami, much of it dictated by dodd frank and promulgated by the Federal Reserve. Thus, serious questions must be asked. Why isnt the fed subject to statutory costs benefit analysis . Why has the fed yet to find any connection between its volcker rule or any other rule in the precipitous drop in Bond Market Liquidity . Why does the fed cough kabucke drama where banks punish . With its all encompassing new Regulatory Authority under dodd frank is a dangerous mix. It is a threat to Economic Growth not to mention the principles of due process, checks and balances and the rule of law. If were not careful, our central bankers will soon become our central planners. Fortunately, the house will soon have the opportunity to reform the fed and make it more transparent with the federal oversight reform and modernization act offered by our colleague mr. Hai zinga and approved by this committee. I now yield five minutes to the Ranking Member for an opening statement. Thank you, mr. Chairman, for holding this hearing and thanks to Federal Reserve chair yellen for making herself available to testify. The 2008 financial crisis inflicted staggering damage to our economy. Within the months before president obama took office, shedding more than 800,000 jobs a month, home foreclosures displacing millions of families, and entire industries on the brink of collapse. Congress responded to this devastation bypassing the most comprehensive overhaul of our Financial System since the great depression, the doddfrank wall street reform and Consumer Protection act. The act entrusted significant responsibility to the Federal Reserve and directed the fed to improve its Supervisory Program so that another crisis of such scope and depth would never happen again. Recognizing that the Federal Reserve failed to apply appropriate prudential standards to large banks, congress directed the fed to impose enhanced requirements for capital, liquidity, Resolution Planning and other factors to ensure that no large bank or group of banks could again endanger our economy. Im eager to hear from chair yellen on the progress of these reforms along with a description of how the fed is using the flexibility embedded in doddfrank to tailor regulations appropriate to the sizes and risks of different types of banks. Congress specifically permitted the fed to differentiate among companies on an individual basis or by category, considering their capital structure, riskiness, complexity, financial activities, size and other factors. The fed could use this authority. Likewise, the doddfrank provided the fed with new responsibility to collectively regulate the activities of systemically risking banks entities such as insurance company, aig, systemic consequences on our economy just seven years ago. I very much would like to hear from chair yellen about how the fed has bolstered its expertise to take on these new responsibilities. Let me also express my deep concern about legislation this committee considered during a markup this week that would severely undermine efforts by the fed to regulate both banks and nonbanks. With regard to banks, the legislation would hamstring the feds ability to regulate all but the largest globally active banks, ignoring how the failure of many large, interconnected Regional Banks could have dire consequences for our economy. Similarly other legislation would undermine the Financial Stability oversight counsels ability to identify supervisory gaps, designate nonbank firms for enhanced prudential regulation, and ensure the fed is regulating them on a comprehensive, consolidated basis. Finally, as we just surpassed the fiveyear anniversary of doddfrank, i think it is important to remind the committee and the public of the need to be ever vigilant of the threat of another crisis. Among our supervisors we must guard against complacency and regulatory capture. Among our law enforcement, we must hold institutions and individuals accountable, something former chairman ben bernanke, in his recent book, said we did not adequately do. Here in congress we must be mindful of attempts to defund and defame doddfrank. The American Economy has made substantial progress since the depths of the crisis. But that progress will be threatened if we do not protect these reforms both in statue and in practice. So thank you, mr. Chairman, and i yield back the balance of my time. The lady yields back. The chairman now recognizes the gentleman from texas, mr. Nogenbau, rerks, chairman of our financial subcommittee, for two minutes. Today marks the First Time Since the passage of doddfrank that someone from the Federal Reserve has testified under the statutorily created vice chair of supervision. Yet today the person testifying was not appointed or confirmed for that position. I remain baffled the president has failed to put forth a single name for this role. I feel its in part that dan tarillo, who serves as chairman of the internal banking supervision, can already exercise many of the authorities and in a defacto capacity, free from any checks and balances. The Federal Reserve, in addition to its Monetary Policy regulation, operates many Financial Institutions, some of them the largest in the world. We have seen decisions driven largely by the Federal Reserve that artificially manipulated the liquidity. Under stress testing, the process is likely the most important thing the bank must do this year remains completely free from any oversight. Internet banking and standards are aggravated and implemented. These are operations and deserve much of our needed attention and oversight. Today i hope chairman yellen will address some of the more intricate points of banking regulation and supervision. Specifically i hope to get a better understanding of how she sees each capital and Rule Making Committee working together. I hope to see how the market manipulates institutional regulations. Weve already seen the bond market where volatility has remained in the liquidity coverage ratio. Finally, i hope to hear her reports of how to make ccar more transparent. She must also talk about how the regulatory standards are prioritized in the ccar environment. I look forward to this particular hearing. Today we welcome the testimony of chairwoman janet yellen. Chair yellen has previously testified at our committee before, so i believe she needs no introduction. Ms. Yellen, your statement will be made a part of the record. You are allowed five minutes to give us an oral testimony. Thank you for being here. I think you need to hit the microphone there. Chairman henserling and other members of the committee, i appreciate the chance to testify on the regulation and supervision of Financial Institutions. One of the firms fundamental goals is to promote a Financial System thats strong, resilient and able to serve a healthy and growing economy. We work to ensure the safety and soundness of the firms we supervise and also to ensure that they comply with applicable Consumer Protection laws so that they may, even when faced with stressful financial conditions, continue serving customers, businesses and communities. This morning id like to discuss how we have transformed our regulatory and supervisory approach in the wake of the financial crisis. Before the crisis, our primary goal was to ensure the safety and soundness of individual Financial Institutions. A key shortcoming of that approach was that we did not focus sufficiently on shared vulnerabilities across firms where the systemic vulnerability of the largest complex firms. In the fall of 2008, the failure or near failure of several of these firms, many of which we did not supervise at the time, sparked a panic that engulfed the Financial System and much of the economy. Today we aim to regulate and supervise Financial Firms in a manner that promotes the stability of the Financial System as a whole. This has led to a comprehensive change in our oversight of large Financial Institutions. As my written testimony describes in more detail, we have introduced a series of requirements for the largest and most complex banking organizations that reduced the risk to the system in our economy that could result from their failure or distress. In addition, we now supervise Financial Institutions on a more coordinated, forwardlooking basis. At the same time, weve been careful to make more measured approaches to firms on the other end of the spectrum. Were committed to ensuring that the supervision of smaller institutions is tailored to the Business Model of larger institutions. In supervising Community Banks, were refining our riskfocused approach which aims to target Examination Resources to higher risk areas of each banks operations and to ensure that banks maintain Risk Management capabilities appropriate to their size and complexity. Given the Important Role the banks play in their communities and the economic support they provide across the country, we recognize that supervision of Community Banks must be balanced and measured. The regulatory forms weve adopted throughout the crisis impose risks of large Financial Institutions in two ways. First, our reforms reduce the probability that large Financial Institutions will fail by requiring those institutions to make themselves more resilient to stress. However, we recognize we cannot eliminate the possibility of a Large Institutions failure. Therefore, a second goal of our postcrisis reforms was to eliminate a systemic end that would result if a Financial Institution were to fail. Again, my statement provides more detail, but i would like to highlight for you two examples of how were addressing this too big to fail challenge. First, to limit the systemic effect of a Large Institutions failure, the board and the federal Deposit Insurance Corporation have adopted a Resolution Plan rule that requires large banking organizations to show how they could be resolved in an orderly manner under the bankruptcy c e code. Second, the board just last week proposed a role setting longterm debt and total loss absorbing capacity requirements for the very largest banks in the United States. With the new requirements, if losses were to wipe out a firms capital and push a firm into resolution, a sufficient amount of longterm, unsecured debt would provide a mechanism for absorbing losses and recapitalizing the firm without generating contagion across the Financial System and damaging the economy. In addition to strengthening the regulation of the largest, most complex Financial Institutions, we have also transformed our supervision of these firms. Our work is now more forward looking and multidisciplinary, drawing on a wide range of expertise. We put together this operation with the creation of the Large Institution supervision coordinating committee, or liscc, which is charged with supervision of the firms that pose elevated risks to u. S. Financial stability. The liscc program complements traditional, specific supervisory work with horizontal programs that examine the same firms at the same time on the same set of issues in order to promote better monitoring of trends and consistency of assessments across firms. For example, our comprehensive capital analysis and review, or ccar, ensure that large bank holding companies, including the liscc firms, have rigorous, forward Capital Planning processes and limited forms of capital to operate during times of stress. I would note that capital at the u. S. Banks alone have more than doubled since 2008, an increase of almost 500 billion. Our new regulatory and supervisory approaches are aimed at helping ensure these firms remain strong. While more work remains to be done, i hope you will take away from my testimony just how much has changed. Our supervisory approach is more comprehensive and forwardlooking while also tailored to fit the level of oversight to the scope of the institution and the risks it poses, and the Federal Reserve is committed to remaining vigilant as a regulator and supervisor of the financial instituti institutions that serve our economy. Thank you. I would be pleased to respond to your questions. The chair now yields himself five minutes for questions. Chairman yellen, the first question i have deals with the concern, has the fed crossed the line from being regulator to manager . Weve had a number of individuals come to our committee to tell us that fed officials have regularly attended Corporate Board meetings of the systemically important Financial Institutions under the feds purview. Is that true . So im not sure if thats true. It is not so you are unaware of any fed officials attending Board Meetings its conceivable that that might have occurred. Im not saying that it did not occur. I dont i would have to get back to you with if it did occur, what Legal Authority would you cite for having employees of the fed invite themselves into Corporate Boardrooms . I dont know what the circumstances are in question, but i can, for example, tell you that when i was president of the San Francisco fed that i occasionally would attend a portion of a Board Meeting of one of the firms that we supervised to make a presentation to the board about our supervisory findings and the emphasis but you are unaware of any fed officials attending these Board Meetings . You have no personal knowledge of this, and this is not a policy with the fed . I really dont have details about what fed officials we would appreciate it if you could look into this, chair yellen, and get back to the committee on this matter. Weve also heard from individuals with respect to the stress tests of which weve had public dialogue and private conversation. Many of us on this Committee Considers that to be, again, a rather opaque process. And so this committee has a number of questions. Weve also asked members of the employees of the Financial Institutions who have been on the receiving end of these stress tests, we have been informed by numerous individuals that they have been told by the fed not to speak to members of congress about the stress tests. Do you have any knowledge of this matter . I have no knowledge of that. Is it the policy of the Federal Reserve to instruct members of banks subject to the stress test not to speak to members of congress . I strongly doubt that thats our policy. You are unaware of that being a policy. Would you object to these people speaking to members of congress . Can you let it be known to your employees that they should not be telling private citizens not to speak to members of congress about stress tests . Private citizens can interact with members of congress. Youre willing to direct your employees to ensure that that dialogue can take place . I will certainly look into that. With respect to the stress test, and again, great concern about how opaque and nontransparent these affairs are, i guess the first question i would have is, we dont doubt that you have many serious employees, very smart, regulatory staff who handle these matters, but we still dont know much about this. How is the market how are Market Participants supposed to be convinced that we have less Systemic Risk when they have no insight into these tests since members of congress have little to no insight into these tests . How are we supposed to reaffirm market confidence . So we do a great deal, in my opinion, to explain the methodologies that we employ. Weve published overviews of the methodologies that we use, and we update those every year. They include detailed information about the scenarios, the analytic framework that we use and information on the models. I guess the information must be in the eye of the beholder, because members of Congress Still dont understand this, and in our dialogue with banking organizations, they still dont understand the test, either. In my remaining time, i have one last question. Again, with respect to these tests. The stress tests have really become, in many respects, your main tool, your main supervisory tool for the large banks. But my concern is, if you have one centralized view of risk and youre imposing that view on our large banking organizations, to some extent isnt that exactly what bossell 2 did in telling banks they had to reserve little to no capital, think bonds fannie and freddie, how can that lower financial risk since we only have one view of financial risk and it may be wrong . I guess i would dispute the idea that we have one centralized view of risk. The purpose of this exercise is to help the firms develop their own analytic capability to model the impact of various stresses on their organizations, and to develop a robust Capital Planning process, which is what we evaluate in our ccar exercise chair yellen, i wish we could conclude the same thing, but we have insufficient information about your stress test to be able to come to the same conclusion that you make. Im over my time. The chair now recognizes the Ranking Member for five minutes. Thank you very much. Im pleased to see you, chair yellen. And unlike the chairman, along with many of my colleagues, weve heard from Regional Banks about the comprehensive capital analysis and review, or ccar stress tests. And they have complained that theyre not sufficiently calibrated to the unique profile of larger holding bank companies. They focus on specific banking activities. Weve also heard that the filing of living wills is cumbersome for banks and not easy for the fed process. Ive not heard that theyre told not to talk to us. They talk plenty and were listening. Congress is considering legislation that would do Severe Damage to the new standards the fed has implemented and their ability to identify and respond to risk in the future. So can you discuss why hr1309, a bill debated by this committee yesterday which addresses this topic would be severely damaging to the feds ability to respond to Systemic Risk on an agile and comprehensive basis . Secondly, will the Federal Reserve commit to doing further tail tailoring using existing authority of the doddfrank act, specifically on two issues a submitted earlier, ccar stress tests and living wills . I am concerned very much about a process that would require, as i understand 1309, would require the board to use a statutorily defined set of factors or make findings based on factors to decide whether or not to subject firms to higher prudential standards. I would see such a process as inhibiting our ability to take timely and necessary supervisory actions to address a firms risk. We do do a great deal of ta tailoring of our supervisory approach to make sure that it is appropriate to the size, complexity and Systemic Risks posed by a particular firm. Were committed to doing that, and we are looking at further ways in which we can tailor our supervisory approach, in particular the ccar process that we were discussing. We have some ideas about how we might tailor it to particularly apply to smaller firms. We have indicated there are some constraints on our ability to tailor our supervisory approach for the smaller firms subject to the 165 requirements, in particular doddfrank requires that we administer stress tests and receive Resolution Plans. Our experience thus far is that the safety and soundness value of those requirements for the smaller of those firms probably is not sufficient to justify the costs imposed on them, and so we would value for the firms on the smaller end of the spectrum being able to relieve them of those requirements. But i do want to make clear that we do tailor our supervisory approach according to the complexity of the firm and theyre committed to doing that. Im so pleased to hear that, because what we heard constantly yesterday was that you do not. That somehow they kept talking about one size fits all and that you are not using your ta tailorring authority, so thank you for explaining that to us, and we are absolutely supportive of your being able to do that. We think it makes good sense, and perhaps what we need to do is work with your staff a little bit more to understand whatever restraints there are involved in tail tailoring and whatever authority that you have and flexibility that you have. But thank you for clearing that up. Thats very important. You know you have the authority, you understand that doddfrank gives it to you, you use it, and you welcome any questions from this committee about how you use it and how you cant use it. So thank you very much. I yield back the balance of my time. The chair now recognizes the gentleman from texas, mr. Noggenbauer, for five minutes. It seems there are all new different kinds of regulation and theyre all trying to drive at the same thing. For an outsider, its hard to see how theyre coordinated. For example, in one broad area, we have the leverage ratio, the riskweighted capital regime as well as the annual stress test known as ccar. Can you walk me through how all of these capital rules fit together and what each are trying to address . Microphone, please. Yes. I mean, certainly. We do see these rules as fitting together. Most of the requirements that you just mentioned are imposed only on u. S. Firms. We think, given the risks, that the failure of one of these firms would pose to the Financial System that its important that they be subject more stringent Capital Requirements, liquidity requirements and ability to survive a very stressed event, and we think the various things that you mentioned coordinate with one another. In particular, we have put in place socalled gsib surcharges that impose additional high capital standards on the gsibs, and its based on our estimate of the impact that the failure of one of those firms would have on the overall Financial System. The supplementry leverage ratio, enhanced ratio, is a backup tool that works in a coordinated way. This has long been the case with the riskbased capital charges. And so we see those as working together. Now, the stress test that we impose on these institutions are very robu a very robust, forwardlooking approach to assess whether or not firms could survive a very adverse stress scenario and continue to serve the credit needs of the u. S. Economy. And so these are coordinated approaches, these socalled tlac requirement that you mentioned, is a requirement that we think is necessary so that if one of these firms were to fail, despite all the resilience we expect of it, that it would be possible as doddfrank requires, to resolve that firm under bankruptcy or alternatively under orderly liquidation. So what kind of comes to mind here is at what point does the ccar process kind of override all the other requirements . I mean, i guess literally they could be in compliance with these other requirements, but they could fail their ccar. So is ccar driving the regulatory process or are these standards youre putting in place driving the regulatory process . Well, i believe theyre complementary, and i think that ccar is a particularly valuable process because what we expect these firms to do is not simply to be able to meet some standard, a minimum capital standard, but what we want them to have in place is the internal ability to analyze the risks that face that unique organization and to have a rigorous Capital Planning process that that firm is using to make sure whatever our rules may say, we want that firm to make sure that they have adequate capital to survive a severe stress. And the stress test and ccar process are looking to make sure that they have governance and Risk Management standards in place that are designed for that organization and for the unique risk profiles that they are managing their risks in the way we would expect a systemic firm to be able to do. But i mean, each entity is different, and so youre imposing many of these standards on all of them, i assume, somewhat on a consistent basis. But the ccar for one entity, the stress that that entity may go under because of their Business Model is going to be different. So do you need all these others if the final test is the big test here, the ccar . We believe its a builtin suspenders approach and that they Work Together in a coordinated fashion. The time of the gentleman has expired. The chair now recognizes the gentlelady from new york, miss spilon spiloni. Chair yellen, id like to ask one question on Monetary Policy. When you testified in july, you said in response to one of my questions that one of the advantages to raising rates a little bit earlier is that, and i quote, we might have a more gradual path of rate increases, end quote. Of course, one of the down side to starting to raise rates while inflation is still below target is that it could end up hurting the fragile economic recovery. Fed governor banard recently said it could take away the support that is so critical to the economys vitality. So my question is, do you think the risks of raising rates in december which most likely will be before inflation reaches the feds 2 target outweigh the benefits . Thank you for that question. So let me say that at this point, i see the u. S. Economy as performing well. Domestic spending has been growing at a solid pace. Our trade performance net exports is soft, but the committee judged in october that some of the Downside Risks had diminished relating to Global Economic and financial developments. I see underutilization of labor resources as having diminished significantly since earlier in the year, although recently we have seen some slowdown in the pace of job gains recently. So with that sort of backdrop in mind, and, of course, inflation, i should say, is as you mentioned, running considerably below our 2 objective. Nevertheless, the Committee Judges the prices and the prices of nonenergy imports, that as those matters stabilize that inflation will move back up to our 2 target. So with that sort of economic backdrop in mind, the committee indicated in our most recent statement that we thought it could be appropriate to adjust rates at our next meeting. Now, no decision at all has been made on that. And what it will depend on is the committees assessment of the Economic Outlook at that time and that assessment will be informed by all of the data that we receive between now and then. So what the committee has been expecting is that the committee will continue to grow at a pace that is sufficient to generate further improvements in the labor market and to return inflation to our 2 target over the medium term. And if the incoming information supports that expectation, then our statement indicates that december would be a live possibility, but importantly, that we have made no decision about it. Now, it is you asked about the timing of such a move. The committee does feel that moving in a timely fashion, if the data and the outlook justify such a move, is a prudent thing to do because we will be able to move at a more gradual and measured pace. We fully expect that the economy will involve in such a way that we can move at a very gradual pace, and, of course, after we do so, we will be watching very carefully with our expectations realized. So when my colleague, governor brainard, mentioned that inflation is slow, if we were to move, say, in december, it would be based on an expectation which, i believe, is justified that with an improving labor market and transitory factors fading that inflation will move up to 2 . But, of course, if we were to move, we would need to verify over time that expectation was being realized, and if not, adjust policy appropriately. I would also like to emphasize that i know there is a great deal of focus on the initial move. Its been a long time that Interest Rates have been at zero. But markets in the public should be thinking about the entire path of policy rates over time, and the committees expectation is that that will be a very gradual path and will depend very much on the actual performance of the economy. The time of the gentlelady has expired. The chair now recognizes the gentleman from new jersey, mr. Garrett, chair of the market subcommittee. We heard the other day about all the benefits that came out of doddfrank and all the work that the fed is doing overall. I want to go back and look a little bit deeper on that, both individually and a couple actively. Back in 1994, Congress Passed a law called the regulatory improvement act. As youre probably familiar, that applies to all federal agencies including the fed that says, you shall consider the costs and burdens that any regulations would place on depository institutions, basically you have to look at the cost of regulations and also the benefits. Now, we do hear about the benefits. I asked this question to governor trulu, have you done this benefit economic analysis, and i didnt really get a very clearance from him whatsoever. Very briefly, in a sentence, do you believe that the Regal Community Development Act applies to the fed, and as such, youre required to do a basic cost benefit analysis each time you do a regulation . Thats a yes or no, i guess. We follow rules of the administrative procedures act and always request Public Comment on costs of our rules. So you do an did you do an actual cost benefit analysis, for example, on tlac . Well, we did do an actual cost benefit on tlac. Do we have a copy of that . And it is described in the proposal that we issued last week. So in some cases we have done a cost benefit analysis. In some cases. In other cases you do not . Well, very often what were doing is putting into effect a rule that congress has directed us to write to implement changes that in Congress View will prove beneficial. Youre doing the rule under the regal then the question becomes when congress has directed us to write a rule that its judged to be beneficial, what is the least cost way of doing that . Let me stop you there, if i may. The regal act doesnt say you can pick and choose as to when you do a cost benefit analysis, it says you shall so not may you shall consider and then it lays out those parameters. It sounds as though youre doing it in some cases but not doing it in other case, which may plain why governor trulu couldnt give me a good answer. Let me move to the broader issue. Since youre not doing it in all cases, your predecessor ben bernanke has said, has anyone done these analyses accumulatively, and he said no. Ill throw that question out to you as well. Have you done an a cumulative analysis on the burdens . I think the answer is probably no. We are carefully monitoring what the effects of these rules are. So let me ask you this. If you have not done and i appreciate your candor on that if you have not done a cost benefit analysis accumatively, and there was a report that he said nothing shows the economy. There is about a dozen factors they came up with, and hes right. The regulatory burdens is not listed as a factor. But now i understand exactly why. Because you just told us that fsoc and the fed never even did a cost benefit analysis cumatively. If you havent looked at it, of course its not a summary in your impacts because youre not even studying it. So i suppose this report is a little bit useless, isnt it, because if youre not going to study the problem, we dont know what the problem is, do we . I think its important to take a step back here and recognize that we lived through a devastating financial crisis. Ill give you that. And the cost of that crisis to households, to businesses, the u. S. Economy was enormous. Is this summary of any benefit to us at all if youre not going to do the basic analysis. We have done basic analysis. When we put in effect the capital rules and liquidity requirements, we have looked at the costs and i appreciate that. But you just told us what everyone else has told us, that you have not done an individual analysis and youve not done a cumulative analysis. If you havent done the study, if you havent done the records, then your analysis of whats protecting the economy is basically useless. Time of the gentleman has expired. The chair now recognizes the gentleman from california, mr. Sherman. Let me give you some advice in the other direction. There are a host of titles and provisions in doddfrank and there are a host of other laws that you carry out. The fact that they come to you in a political package called doddfrank or they come in some other package is of great interest to politicians. But those are different titles. Just because a provision was in doddfrank doesnt link it with another provision of doddfrank or delink it from other provisions of laws that were passed earlier or later. So i would hope in carrying out your responsibilities, you would look functionally since the purpose is to give us advice how to improve derivatives regulation, how to improve a depository institution regulation, and leave it to the politicians to secondguess bills named for politicians. We do get one benefit from the fact that the vice chair for supervision has yet to take office, and that is that we get to spend another day with you. This is a great personal. As i argued back in the summer, gods plan is not for things to rise in the autumn. In fact, thats why we call it fall. Nor is it gods plan for things to rise in the winter through the snow. Gods plan is that things rise in the spring, so if you want to be good with the almighty, you might want to delay until may. And i know there are a bunch of things youre aware of. Many economists say we shouldnt move forward now, managing director of the imf has been fairly candid. Weve got deflationary risk. We just have a bad growth report. Youre aware of it but you probably wont estimate it as highly as i will because of my occupation, but dont underestimate the ability of both u. S. And europe to screw things up. I mentioned last time the psychological advantage of retirees of nominal Interest Rates so they can live on their entire savings without much principal. That is not in the gdp statistics. As a matter of fact, you reduce the gdp statistics, but it does enhance. Then finally, as i pointed out to you, and i do want to talk to you privately about this, fasb is coming up with this new 2 trillion change that will hurt construction to press the economy. The other thing is if you act too soon and you decide, oops, we acted too soon, you get you put yourself in a position first where you have a zigzag second, if you then want to go in the other direction, you only have a quarter point to play with. If you hit the brakes too soon, you dont have gas. With that in mind, im concerned about the effect raising Interest Rates now would have on the real estate recovery and i would ask you what you would think the impact would be of raise zing Interest Rates on the housing recovery and would we squeeze credit worthy borrowers out of the Housing Market and create a negative feedback loop with prices going down . So you have made very large number of very good points and indicated many relevant considerations that the committee is trying to weigh and balance and has been taking into account. With respect to the Housing Market, of course the level of Mortgage Rates is relevant to housing, but, we are very aware that, for example, a sharp rise in Mortgage Rates could have a very negative effect on housing. We do, however, have a recovering economy where employment is going up, income is going up, households are in better shape to form households. Whether its that they are moving into rental properties, the millenials seem to have a strong preference for later house purchases. But we do envision gradual recovery in the economy in the housing sector. Let me come back to the point that i made earlier, which is the committee anticipates a very gradual increase in Interest Rates. We are not envisioning that when we begin to raise rates we are going to be looking at a very steep path of Interest Rates that would cause the kind of harm you are worried about to the housing sector. So that whole path matters. That is a gradual path. The time of the gentleman has expired. The chair recognizes the gentleman from missouri. Mr. Luetkemeyer, chairman of the housing and insurance subcommittee. Thank you, mr. Chairman. Its interesting to listen to the gentleman from california. Hes a very bright guy with lots of interesting correlations, but ive never heard gods plan for the seasons correlated to the feds plan to raise Interest Rates. I enjoyed the discussion this morning, gentlemen. Welcome, chair yellen. I want to talk about the designation of insurers. Im very concerned that fsoc and the fed have become the rubber stamp for the financial ability board. Its my understanding they made the designation for globals, that extensive analysis from companies other than what was publicly available. So my question is, is that the case . If you did not receive intervention from the company, how did you reach the conclusion that they posed a risk to the global system . Well, congressman, in the case of the companies that were designated, in every case, there was an extremely detailed evaluation that was done and a summery of the evaluation is publicly available. It did involve interaction with the company. Excuse me, did the analysis come from fsb or your own analysis . This was the analysis of the fsoc. Fsoc. The fsoc and its staff prepared very detailed assessments of what the consequences would be for the u. S. Financial system of the failure of one of these firms. Its interesting. Thats not the answer that we get from the insurance side of this, the company side of this. Did you solicit any information from them or do you just take fsbs information and try to analyze that . We have detailed information from the companies. Youve got outside information that is available . Absolutely. Part of the designation process in stage three of the designation process, there have been detailed interactions with the companies. They have provided information. They have had every opportunity to weigh in and to offer their views of if i could interrupt for a second. Its kind of interesting, though, that the one individual on fsoc who has some insurance background is the one who said no, we dont need to designate them as systematically important. Yet fsoc went ahead and did it. Can you enlighten us why that would occur . Why did the other folks that were not experts think we need to be designated where the expert said no, we dont . We have a great deal of expertise in insurance on the fsoc and among the staff who look at this. What i can assure you of is very Detailed Analysis was done, Firm Specific analysis of with the consequences of failure would be and the firms had ample opportunity to weigh in. And they very well understand what the logic was of why they were designated. All due respect, chair yellen, im not sure they have time to respond. Because now theyre going to court to try to resolve the situation. I think if they could have responded to this, certainly there would have been an ongoing discussion that could have minimized this and they wouldnt be going to court. They would have agreed with the analysis or your designation. Let me disagree. They have had a detailed opportunity to weigh in and in the case of one firm, i was only involved, myself, in the designation of one firm and that firm had an opportunity to meet with the entire fsoc. Okay. Well, i recently had the opportunity to meet with some of the International Folks who designate it. It was very concerning the way they went about it. I think, to take their analysis without our own analysis is very concerning. We have absolutely not taken International Analysis to substitute for our own. We have done our own analysis. Ill take you at your word. With regard to one other issue here, yesterday, we passed, this committee a bill to deal with a specific designation for banks. In the bill, we have guidelines that actually you use, the fed uses in their own analysis just recently in the bb t susquehanna merger. I was kind of concerned with the way the discussion went and the with the Ranking Member with regards to the guys on provided in our bill as being the only ones considered. Im sure that you take those into consideration as well as other ones when you make that sort of decision, do you not . We take we try to tailor a Supervisory Program we think is appropriate given our full understanding of the risk characteristics. The ones detailed in my bill are significant ones you believe need to be used to provide the guidelines to make the designation. We look at those factors but we tailor an entire program that is specific. I appreciate. On the previous testimony of this committee, you have agreed that those are important criteria and youre in support of the bill. So i thank you for that. Time of the gentleman has expired. The chair recognizes the gentleman from massachusetts, mr. Capuano. Thank you. For the record, i want to clarify, some of us do an exclamation point after your name and as a matter of fact some of us use hashtags and a few other things that are in there, too. I just want to be clear. Some may not but some do. As long as you spell it right. Madam chair, thank you for being here again. As always, its a pleasure to see you. I have a few questions and we are going to start on one that kind of has been a bit concerning to me. I think for the most part, most of us have been quiet about it. Thats the requirements of section 956b, 956b of the dodd frank act. It requires the fed and others to take action relative pay for banks. I want to be clear, i do not care how much anyone in this country makes. How much is not my concern. The how is a concern. It is a concern in law because of the incentives that may be involved. Some of us think those incentives has a lot to do with the 2008 problem, yet the law says 90 days. Fine. Okay, 90 days, 180 days, 360 days, its now 2015. Seven years seven years we do not have a regulation on this issue. Im just wondering, could you tell me, when do you think we might have one . So if i might start by saying that from a supervisory perspective, many years ago, we put into effect guidelines pertaining to incentive compensation and our supervision is very attentive to aspects of incentive compensation that could lead to excessive risk taking. Its not focused on the total overall level of pay, but the adverse incentives that could be embodied in that pay. But thats not the regulation that is called for by law. Its been very challenging. There are many agencies involved in trying to come up with this compensation rule. Whats the holdup . How do we help . Who do i have to kick to get this done . I cant i mean, i cant give you a good answer. Have you done your job . Well, as i say, we have been working with the institutions now for many years to yes, i know. The law says 90 days. At some point, regulators have to regulate. Im not complaining its 91 days im not complaining its 365 days. But, if its not you, tell me who it is. If its my friends at the fcc, first of all, i wouldnt be shocked. And second of all, maybe thats a pretty fair thing. Have you done what you need to do to get this regulation, required by law, simply to allow us to know the incentive that is are involved and to prohibit inappropriate incentives that did help lead to the 2008 debacle. Have you done your job . We have tried to work constructively with the other agencies. I love when chairs never give answers. We have done i think the fed has done a pretty good job. Im not complain 00 the fed. But this is long overdue. Each regulator that comes before me, im going to ask. I dont say do a specific item, i dont care how much they make. Do it so the american person doesnt get on the hook again. On an item that we have already identified as a problem that everybody agrees was a problem and that should be relatively easy to fix. I agree with your assessment, that it was an important problem, that it is essential to address it. And as i said, in our supervision, we have addressed it, and we do feel we have seen very meaningful changes. I want the regulation that was required by law. I understand that. Thats what i want. I want the regulation done so that the American People will feel comfortable. Two other items since my time is running out. One, i want to talk basically, im not pushing yet, but looking forward to the results of the current the next iteration of living wills. Back a few years ago when we had them, all of them were called not credible in the living will provision in dodd frank as you know was pretty important to many of us. With think its a way to avoid too big to fail. It allows the institutions to say dont worry, we can take care of ourselves, we dont need help. When they are all called not credible, thats a problem. I know youre in the process now. Do you have any idea what the time frame might be when you are into the Second Chance . So last year the board working jointly with the fdic sent very detailed evaluations of the living wills to the firms and directed the firms to take action to improve their resolvability that were quite specific and quite detailed. Time frame . We have received those plans. We are evaluating them jointly with the fdic. Thank you. And we will be making decisions in the coming months. Time. Time of the gentleman has expired. The chair recognizes the gentleman from michigan. Mr. Huizenga. Thank you, mr. Chairman. Im happy, chair yellen to rescue you from the hostile questioning of my democrat friend over there. Dont take it personally, hes like that with everybody. But i do actually want to kind of follow on on something that he had point of interest and frustration for a number of us. Is having to do with the speed or lack thereof where there has been some very specific things that were laid out for the fed to do, and specifically, i want to talk about section 13. 3, the fed, dodd frank required the fed to adoption regulations, quote, as soon as practicable. And that was five years ago. There have not been a final rules implemented to what fed reserve restrictions you yourself were going to put as far as and guidelines as far as utilizing 13. 3. So im very concerned that that is taken that long. When is that that the fed is going to issue those final rules . We expect to issue the final rule by the end of this month. By the end of this month. I will point out to my friend from massachusetts, just talk nicely and shell give you a great answer. So my next followup question on that is will the rules address the concerns that senator warren, chairman hensarling and others have put forward regarding whether your earlier proposal leaves the door open to future wall street bailouts . So let me just say we regard our emergency lending powers as very crucial powers. Its very important that god forbid there should be a future financial crisis. We hope that wont occur. But if there is, thats why the Federal Reserve was created to provide liquidity when there is a financial panic and lenders are worried about the state of Financial Institutions and markets generally. Those powers we use during the crisis to keep credit flowing to the economy. Sure. We want to be very careful about what we do. Sure. And the words used for that are unusual and exigent circumstances . Correct. In my format, we take that and we say, we add upon it, raise the bar, marginally, i would argue and we use language, quote, unusual and exigent circumstances exist that pose a threat to the Financial Stability of the United States. You have come out and some of the other fed governors have come out opposed to that language. Why . Well, thats when we would use im not sure that we have been opposed. Thats when we would use those powers when there are unusual i understand. Its understood to mean pose a risk to the Financial System. We kind of added two things as a belt and suspenders, a phrase you used earlier. One was to include the language that pose a threat to the Financial Stability of the United States. And certainly informally, that is the pushback we have gotten. I met with some of the other fed governors and they have pushed back saying we should not address 13. 3. The other one we have is in my bill, section 11. We also mandate in addition to the current requirement of five of the seven fed board governors to approve a 13. 3 usage, that 9 of the 12 district federal Bank President s must also approve. Any concern with the belt and suspenders approach that way . I think the approach that we have currently thats in dodd frank is quite adequate. So you do have a concern with adding the district fed Bank President s . I might have some concern with that. What concern . This is always been a board power to decide when to authorize particular reserve banks to engage in programs through the discount window, emergency lending programs through the discount window. But you understand theres a bipartisan concern, and bicameral concern about how that has been used in the past, and that there is too big of a door open yet for these massive wall street bailouts to happen, and that what we are trying to address is, in addition to adequate collateral and insolvent borrower definitions, were trying to make sure thats not just a check and there is just not a rush to find a solution here, but that we also have the fed Bank President s in there. Well, dodd frank clearly restricts the way in which this power can be used and the rule we finalize will address concerns about the definition of broadbased eligibility insolvent borrowers and pent rates. The time of gentleman has expired. The chair recognizes the gentleman from texas, mr. Huizenga. Thank you, chairman and Ranking Member waters. Welcome madam chair yellen. Thank you for your appearance here today. Please accept my gratitude for your steadfast leadership at the Federal Reserve. The dodd frank act reforms paved the way for solid and steady Economic Growth by restoring confidence in our markets. Its one of the pillars of reform, supporting the creating of 13 million private sector jobs for 67 consecutive months, extending the longest running growth streak in our history and reducing the Unemployment Rate to 5. 1 , the lowest since 2008. My first question is as follows. You indicated in your testimony that the fed has tailored its regulatory and supervisory requirements for regional and Community Banks. However, i continue to hear from banks of all sizes in texas and in my Congressional District that theyre burdened by the regulation and the costly stress tests required. In fact, one Regional Bank of texas, one of their facilities is in houston spent 20 million in its stress tests alone. In your opinion, do our financial regulators currently have the discretion they need to correctly tailor regulatory and supervisory standards or should we in Congress Take action . Congressman, my understanding is that stress tests are required of banks that are 5 billion and above. And the requirements for the smaller banking organizations are very different than those for the larger, above 50 billion organizations that they are only required to do a company run stress tests for the smallest organizations theres no such requirement. Now, i did say earlier that we dont have as much ability with respect to stress test to tailor as i think would be ideal. There are smaller banking organizations where we do see costs of having to participate in the stress tests and benefits that are probably not commensurate so that is an area that we are focused on where were tailoring as best we can, but some legislative change to reduce the burden on the smaller institutions subject to it could be useful. My next question, last week, the fed finalized the total loss absorbing capacity rule for the largest eight banks. Yesterday, i read in bloomburg where they reported the Standard Poors as well as the other Credit Rating agencies make up the rating of these banks, based on the prospect the United States government is less likely to provide aid. In case of a financial crisis. Can you elaborate for us how tlac works and how it makes it less likely that a government bailout will be needed in case of a future failure of one of these very large banks. Well, thank you for that question. Itss an important regulation that is intended precisely as you say, to mitigate too big to fail and to the extent that the ratings agencies recognize that a firm is more likely to be able to be allowed to fail, and they reduce the socalled uplift, thats good. Its my understanding here in congress that there is no willingness to repeat what we did back in 2008 to save the banking system. Let me go to the next question. Yesterday, we debated replacing the 50 billion threshold for mandated enhanced prudential standards with a Financial Oversight Council designation process. What is your opinion on what the threshold should be . So we would not like to see an fsoc process that tells us exactly how to tailor our supervision to firms of different sizes. We already have an elaborate program in which we do tailor the requirements within the confines of law to match the footprint and complexity of the firms. And there are only a few areas where we have concerns that we may be limited in our ability to do that. Stress tests and Resolution Planning are two areas where i would say the smaller of the firms above that 50 billion threshold, we would like to be able to reduce the burden on them. Generally, we have been able to tailor it. Thank you for answering my question. Time. Time of the gentleman has expired. The chair now recognizes the gentleman from wisconsin, mr. Duffy, chairman of the oversight investigation subcommittee. Thank you, mr. Chairman. Good morning, ms. Yellin. When you were here in october, we had an change about the lauft subpoena we made to the fed. You were unwilling to comply with the subpoena. However, two weeks ago you did comply with that lawful house subpoena and we are grateful for your cooperation with the House Oversight committee. In your cover letter, when you provided those documents, you stated as chair, i implemented the practice all suspects material, Security Breaches in involving fomc information. Why is that your personal practice and why isnt that the policy of the fed . Well, the policy of the fed, it was adopted back in 2011, i believe, stated that if the chair was alerted to a breach, that the procedure would involve asking the fomcs general counsel and secretary to review the matter and to decide whether or not should it be referred to the inspector general. Im aware of that. Every january dont you need to go to the lead policy on the program for fomc information and you set the policy every year. Since you have been chair, you havent made that the new policy, you only made that the personal practice. You could, this january, change that rule and make it policy, not practice, right . Well, if it seems appropriate to look at it, its something we could do. My understanding of that of the existing policy, im simply trying to say my understanding of the existing policy is that if there is a material breach, should it be referred to the inspector general, and i have done that. Thats been my practice. And i think that out to be the understanding. You can change the policy this coming january. I think with all thats happened, i think you should change it from personal practice to policy. But it brings me to a question about the policy. The way it currently is written, if there is a leak, you will have the fomc secretary and the general counsel make a review and then make a request to the inspector general. But its fair the say that the general counsel, who would make the recommendation for referral also is privy to Sensitive Information, which would mean that there could be a conflict of interest, that the general counsel could actually be the leaker, and hes also or shes also the one that is responsible for referring the matter to the ig. Do you see the conflict there . Thing is ripe for some internal policy review at the fed. And i would encourage you to take that under consideration. Let me simply say that i think maintaining the confidentiality of Sensitive Information is, to me, a very high priority. I know, but thats not my point. I think that you can see that theres an issue here on how the policy works internally, and i think you could work on changing it. I only have a couple of minutes left. The wall street journal recently reported that the white house and treasury were made aware of the 2012 leak. Is that true before congress was made aware in december of 2014 . Not to the best of my knowledge. But you were aware that they were doing a background check on mr. Carpenter for a potential nomination from the fed to treasury, correct . You are aware of that process . You are not aware of that . I know that he was has been nominated to be assistant secretary. And as part of a background review, you telling me they did not reach out to the fed and ask about his access to this information that was involved in the leak, and you did not provide that to the white house . I i dont have direct knowledge of that. Do you have indirect knowledge of that . I thats a particular matter pertaining to an employee. It has no, no, no, come on. Madam chair, here is my concern. That we find out in congress, who have the oversight over the fed. And we find out in december of 2014. However, before the nomination, the white house has this information about the leak. The white house and treasury that dont have any oversight over the fed are made privy to not just the internal investigation at the fed, but also they received the ig investigation. And so it brings a im not aware thats correct. I think it would be maybe Standard Practice for an agency thats considering a nomination to do a background check and that might involve asking the previous employer is part of the government. I would agree with that. Also, its common practice for the Oversight Committee to send subpoenas that are lawful to the agencies in which they oversee, and that agency actually comply with the subpoenas in a timely manner. I have done my best to do that. Thank you. And i believe we have now fully complied. You have, thank you. Time of the gentleman has now expired. The chair recognizes the gentleman from missouri, chairman clay. Ranking member of the substitutions committee. Thank you, mr. Chairman and thank you chairwoman yellen for your return visit. Hr1309 would remove the feds ability to make safety and soundness decisions and place them with the fsoc. What impact would this dilution of your authority have on your ability to work with International Regulators . Well, it is important to the fed to be able to put in place the Supervision Program that we regard as appropriate for a particular institution and we would not like to see fsoc involved in determining exactly what that appropriate program would be once a firm is under our supervision. Theres no real relationship, im not sure when you Say International negotiations, im not sure whats involved there. Let me elaborate for you. Under hr1309, designation of banks for enhanced prudential standards can only be undertaken if the fsoc follows standards developed by the International Basel committee made up of banking regulators from over two dozen countries. I see. Do you know of any major nation that defers their Domestic Bank safety around soundness regulations to a board of International Regulators . No, i do not. Thats a very useful committee. We participate actively. We want to make sure that other countries put in place tough safety and soundness regulation that is will be good for our firms and for Financial Stability. But nothing is law in the United States or is adopted as a regulation unless we deem it to be appropriate for our firms and i believe all countries behave in this same manner. This is International Bodies or coordinating bodies where consultation takes place, but that doesnt substitute for domestic rule writing efforts here in the United States. Sure. That would be a highly unusual. Arrangement. Extremely unusual. Lets shift chair yellen to insurance capital standards. Now that the insurance capital standards clarification act which gives the Federal Reserve flexibility in implementing capital standards for Insurance Companies subject to enhanced supervision has been signed into law, can you please provide an update on the Federal Reserves implementation . Well, we appreciated the flexibility that that law provides to us to design an appropriate capital regime for insurance Centric Companies that we supervise. We are taking our time to really understand the Business Models of these firms so that we can tailor the regulations in a way thats genuinely appropriate to their Business Models. We are working on that in the process, we are closely consulting with the National Association of Insurance Commissioners with the federal insurance office, with representatives of the industry and the firms. Again, to be clear, we understand their Business Models. We want to get it right and take the time we need to understand what will be appropriate. Right. It sounds to me as though you are on the path to getting it correct. We are definitely on the path to implementing that. This week, the Federal Reserve bank of new york is for the second year in a row, hosting a conference to promote the importance of a strong culture of compliance within the banking industry. In light of the seemingly endless series of bank violations on everything from sanctions and mortgage fraud to manipulation, the focus on improving bank culture certainly seems appropriate. Can you discuss what the boards role has been in the effort to improve bank culture . We have been extremely disturbed by the pattern we have seen of violations in a whole variety of areas, foreign exchange, we have imposed exceptionally large finds and in a number of cases barred individuals from continuing to work at this supervised institutions or the industry and we do fully expect, as part of our supervision that the boards of directors of these firms will put in place rules and tend to the culture so we do not see a continued pattern of flagrant violations. Time. Time of the gentleman has expired. The chair now recognizes the gentleman from new mexico, mr. Pearce. Thank you, mr. Chairman. Thanks, madam chair for being here. Kind of as a continuation of the question that mr. Capuano had, do you all ever sit around as a team and assess the things that were within your control leading up to 2008 that you all were doing sort of a bad job of regulating and say hey, we had internal failures here. We were sitting in the room. We were allowing this. We saw longterm capital collapse. We saw the instability. I think greenspan actually forced the banks to come in and buy the bad assets just because he could and he was trying to save a system. Have you all sat around and had that discussion internally as a team that we need to do better . Thats a set of discussions we have had over many years. Lessons learned, exercises about how did this happen and what do we need to do differently so that it doesnt happen again. I have tried to describe in some detail in the testimony how we have changed the process of supervision as well as more broadly our monitoring of Financial Stability risks in the system outside just the portion that we regulate in order to avoid the problems. Right. If i could then follow that with you are saying the things in the system that provide a risk. So, i understand that, i mean im getting mixed signals whether or not you release the standard on the evaluate firms. So im not quite sure. My question is, do you really look at the systems themselves . Your comments say that we aim to regulate and supervise Financial Firms in a manner that promotes stability of the Financial System as a whole. And its that Financial System as a whole that i think provides maybe the greatest risk to the largest firms, or all of us. So are you really discussing that . Are you discussing the fact that the brick nations are forming the ndb or whatever they are forming that other nations are trying to figure out how to avoid the u. S. Currency because of our actions internally. Are you having that discussion . Well, we are bringing together a Diverse Group of people to consider what the significant threats are that could affect not only individual firms, but a set of firm that is are large and interconnected. With respect it could involve foreign threats. It could, for example, when there were stresses pertaining to the euro area, focus would have been how could they could your share with me the parts of the discussion that deal with china selling down its debt . With them selling treasuries, they have decreased the percentage from 74 to 54 . That, to me, indicates a strong reaction against our policies and against our dollar. And it is maybe the biggest threat. Forget the internal stresses of corporations. Think about the fact that the ground we are standing on, literally is going to get unsolid and very quickly. Can you share with me the concernses that have been expressed about china internally selling its treasuries . China has been selling treasuries because its currency has been under downward pressure. And in the market, there is a demand well, then i understand that. I only have a little bit of time. I dont mean to interrupt. So lets step aside from that, if thats says there is no concern there. Look at the fact we are putting out 1. 1 trillion of debt and you have 300 billion being purchased. That leaves a gap of 800 billion. Forget the chinese and everybody else. You, the feds are going to have to fill the gap with printed money for the 800 billion. 800 out of 1. 1 trillion. You all should be saying, this is really outside the scope of what the stress tests are showing us on the banks. So tell me a little bit about that conversation. Congressman, we have no intention given the Economic Outlook of expanding. We are maintaining our holdings of securities that we acquired during the period that we let me wrap up. I only have 17 seconds. We have no intention of adding to the holdings. So this morning in barons, they say they compare the situation to zimbabwe. This morning in barons they say that the Federal Reserve is making itself the lender of last resort. I mean, these are huge warning signs to us, and we are sitting here talking about relatively small stress tests inside different banks. I appreciate the work you are doing. I really think we ought to be looking at it deeper. Thank you. Yield back. Time has expired. The chair now recognizes the gentleman from georgia, mr. Scott. Thank you, mr. Chairman. Ms. Yellen, let me first ask you about basel capital. Who is it that the basel Capital Requirement do not recognize the exposure offsetting nature of segregated customer margins that are posted from a derivatives client . And then that goes to a bank. At the bank, they then guarantee the clients transaction with the clearinghouse. This is particularly when five years ago we, here in congress with the dodd frank act actually encouraged more derivatives clearing as a means of reducing clients counterparty risk. So my question is what sort of message are we sending these clients who post margin to offset this guarantee by not recognizing it as such . So congressman, im not sure that i can respond properly to your question. I may need to get back to you on that. I mean, we certainly have required higher margin requirements both initial and variation on nonclear derivatives. Is your question about the Capital Requirements on the assets that are being held . Is that yeah. I think its sending a conflicting message to the public, particularly when we, on one hand, are encouraging more derivatives action for Risk Management. Yet, the basil Capital Requirements do not recognize the exposure offsetting nature of the segregated customers margins. So my point is, we need to send a clearer message to the public as to how basel capital is interreacting with this margin requirement of posting. So the Important Message we want to send is weve taken key steps to make the derivatives markets and transactions safer and less a source of risk. And i promise to get back to you on details about how that interacts with basel. Yeah, this is very important chairman. As you well know, derivatives and swaps now as far as Risk Management is now an 822 trillion piece of the worlds economy. We need to take a little bit better care of making sure we send out nonconflicting information. I want to go back to another question about the designated company. And as a member you are responsible for determining when a designated company no longer presents a risk to our Financial System. So it would be important if you could tell us in a little nutshell exactly when does a designated company no longer present a risk to the Financial System and therefore should be dedesignated . And in your opinion, it is not important for fsoc to communicate clearly and publicly what are those specific risks that they present so we can have transparency in the process so the designated companies and the public will know exactly what a designated company is and what those issues are. So fsoc can explain very clearly to the company and to the public what the basis was for designation. So it is no mystery at all to the companies what aspects of their Business Model caused them to be designated. The firms have that information. Every year, fsoc reconsiders whether or not designation is appropriate and looks at the changes that have occurred in the business of those designated firms since it last reviewed them. If there are significant changes, then a firm can be dedesignated. Now i want to get this last bit of a question because i want to know what if we here in congress made a move to improve the transparency and due process designated companies received in the dedesignation process, what would you recommend we do . I dont really think its necessary to do anything, because these companies have every opportunity to provide information to fsoc, to tell us that their Business Model has changed, to ask the counsel to consider dedesignation. I think, you know, you probably know the ge capital has significantly changed its Business Model. Its decided that its in their interest to do that. They have not come to fsoc, yet, to the best of my knowledge to ask to be dedesignated. A company like ge capital could present information to fsoc and when asked, there would be an active discussion of whether its appropriate. Time of the chairman expired. The chair recognizes the gentleman from virginia, mr. Hurt. Thank you, mr. Chairman. I want to thank the chair for appearing before us today. I want to thank the chairman for holding this important hearing. Madam chair, we have discussed before sort of the dynamic. In my rural Congressional District in my rural Fifth District of virginia where access to capital is absolutely critical for job growth across all those main streets, across all that farmland that i represent, its important to our small businesses. Its important to our farm. And its important to families. I think those of us that live in rural areas depend disproportionately on rural banks. And i appreciate your testimony upfront talking about the efforts that you have made to try to tailor the rule making, tailor the regulations supervision to try to accommodate the difference in size and complexity of these institutions. But, i think, i hope you agree despite these efforts Community Banks have been disproportionately affected. Dean mahoney who testified before our committee previously, he testified that dodd frank is in significant part is designed to enhance the regulatory reach of regulators. Inevitably that will mean increasing the size, market share and political clout of the largest banks. If you look at the trend over the last few decades, its been brutal for Community Banks in the five years doddfrank has been enacted and seen a drop in the number of Community Banks from 7700 to 6300. A whopping 20 loss. The rate of consolidation has doubled. This Regulatory Regime and supervision has clearly impacted our smallest institutions. I hear from institutions across our district who say all i have time to do is paperwork. I dont have any time to serve my customers, to go out and look for new business. In one instance, i recently talked to a Bank President who said i realized i had a problem when we were up for an examination and we had more examiners, Bank Examiners in our boardroom than we had bank employees. Those are the kind of stories that we hear as we travel across the district. I guess my first question really deals with why you are here. We know that the dodd frank act included one provision that would create a vice chair for supervision. And i guess my question is, or let me just tell you what paul volcker said. You know what he said after it was included. He said this new post might turn out to be one of the most important things in there. It focuses the responsibility on one person. And we know this is a senateconfirmed position. So i guess my first question is if you would agree that effective and balanced supervision is an important part of the role of the Federal Reserve . Absolutely. It is one of our most important responsibilities and i spend a great deal of time on it, take it very seriously. I guess my next question would be then if there was a Senate Confirmed person in that place, or in that spot, how would that affect your ability to focus on what your other responsibilities are in the larger picture . Wouldnt it be good as in fact former fed chair volcker said, wouldnt bit good to have that position filled . Congress created that position. I would welcome having it filled. I have to say we now have a division of labor among the governors on the board. We operate through a Committee System. We do have a committee. The position remains after five years unfilled. Yes. The governor heads our banking committee. He has not been confirmed for that position by the senate . Thats correct. But i would say hes done an outstanding job leading our work in this area and all of us, including me, need to be involved. Do you believe the fact this Important Role in congress Important Role in the appointment of that, does that reflect, do you think, the president s view of whether having a balanced and effective supervision, having somebody, as volcker said, who is dedicated to this, striking this balance, does that reflect the president s priorities . You would really have to ask the white house why theres not yet considering that this is the law, dodd frank is the law of the land at this point, at this time, is it appropriate for you as chair of the fed to press the president to fill this position . Is it appropriate for you to do that . I think that we as i said, i think we are carrying out our supervisory work in a very thorough and thoughtful fashion but would welcome nomination of the position. Time of the gentleman has expired. The chair recognizes the gentleman from texas, mr. Green Ranking Member of our oversight investigation committee. Thank you, mr. Chairman, and thank you, madam chair for your appearance today. Madam chair, dr. King, mlk, reminded us that life is an Inescapable Network of mutuality tied to a single garment of destiny. Whatever impacts one directly impacts all indirectly. We found this to be imminently true with lehman and bear stearns. The failure of these mega institutions had a direct impact on us but indirectly they impacted the Global Economy, which is integrated to an extent that many of us cant even imagine. I mention this to you, madam chair, because its not just a failure of a bank in the United States we have to concern ourselves with but the failure of these mega banks in a foreign country. Because of the indirect impact that it can have on the United States and other Banking Institutions around the world. I see some value in this living will for these mega institutions and the lesser institutions as well, simply because when we had the failure in 08, we had a crisis such that banks were reluctant to lend to each other. When banks wont lend to each other, you dont have a lot of options left. I mention all of this to you because im getting to the 50 billion threshold. Youve indicated a willingness to see that threshold lifted but i believe youve also indicated you would still prefer to have the opportunity, if necessary, to revisit those that are below the 50 billion threshold as to ascertain whether or not they may become sifis by virtue of their activities. So you have mentioned lifting it. Im not going to ask you at what point you would go to, in terms of lifting. But are you saying to us that you still prefer a trigger of some dollar amount . Currently we have the 50 billion trigger. If you lift it, do you still want a trigger there in of a dollar amount or are you amenable to going to a means by which only the activities will determine the sifi destination . I certainly remain amenable to having a dollar threshold. To the extent ive discussed the possibility of raising the threshold, i would really only support a very modest increase in the threshold. Once we get to a slightly higher threshold, were dealing with institutions even when were looking at the large Regional Banking organizations that are very important suppliers of credit to the country collectively, even the, you know, the regional organizations have probably a trillion dollars of more lending throughout the country. And while conceivably the failure of one of these organizations would not bring about the downfall of the Financial System, it could impact a significant portion of the country in the borrowers who depend on these institutions for access to credit. So i think a threshold is appropriate, especially in which banks over that threshold are designated for more intense supervision, especially if we have the ability to tailor our supervision. The only reason that i have said id be supportive of some modest increase in the threshold is because dodd frank does impose some requirements on this smaller institutions in the area of stress testing and Resolution Plans, where we have limited insufficient flexibility to remove those requirements, and we really think the costs exceed the benefits. Thank you. Moving quickly to the Interest Rates, you have a Global Economy weak and by some standards, continuing to weaken. How much emphasis do you have to place on the Global Economy when setting the Interest Rates within our economy, given what i said about the Inescapable Network of mutuality . We are mutual and interconnected. We take Global Performance into account. At the moment, what we see is a domestic economy that is pretty strong and growing at a solid pace offset by some weakening spilling over to us from the Global Economy. On balance, as we said, we still see the risks to Economic Growth and the labor market is balanced, but the Global Economys been a drag. Time. Time for the gentleman has expired. The chair now recognizes the gentleman from ohio, mr. Stivers. Thank you, mr. Chairman and chair yellen, thank you for being here today. The gentleman to my left, mr. Hurt already talked about the reason for this hearing is statutorily mandated around your supervisory rules. And normally the vicechairman president ially appointed and still filled by acting. When he was appointed by you to that acting position . I guess i wouldnt call it an acting position. We have a Committee System in which up to three governors oversee particular functions that we carry out. Supervision is one of those functions. There are other areas of oversight of reserve banks and so forth. So forth. This is a longstanding practice and the chair of the committee on banking supervision, governor turilo, that individual has long been how long has he been doing that . Hes been doing that two years . He did that under chairman bernanke, since he joined the fed, i think that was 2009 if im not mistaken. Okay, so five years. Not having him here even though hes acting in that role reduces the accountability, it reduces the interaction that the person in that supervisory role should have. So my question for you is, will you commit to allowing him to accompany you to these hearings in the future, these semiannual hearings . Governor tarullo has testified on many occasions to our Oversight Committees and usually stands ready to do so. I certainly have no concerns about having him come up and answer questions. I hope youll bring him with you next time. Hes the one making a lot of the decisions. I know youre his boss and youre engaged but we really need him here because these are important. The next area id like to quickly talk about is the impact of regulation. So as you know, we dont live in a static world, we live in a dynamic world. Every time we take an action there are responses to that reaction aor to that action. Regulation has increased the Compliance Costs for many Financial Institutions, created barriers to entry, and the result has been a consolidation of assets in the too big to fail banks. Its almost been the opposite of what we as policymakers would have liked to have seen. On the volcker rule, the result has been a reduction in the number of marketmakers, which is a market utility function that provides important liquidity during a crisis. I guess i would ask you, are you trying to look at these unintended consequences because in both these cases, we are actually making creating problems through unintended consequences. We certainly are looking at consequences. In particular, in the case of market liquidity that you mentioned, that is something were looking into very carefully ive asked ofr to do a report, ive asked others to do a report on it. And hope you guys will do a report. There are basic drivers to it. Simplification, the volcker rule and coming dll standard, a lot of things driving it. I would like you to do an analysis to it because liquidity is so important to anybody that whether theyre a small 401 k person or a large corporate entity, because we all enter and exit through the capital markets. If theres no liquidity, the marketplace doesnt work. Completely agree. That is why were looking at it. As we issued a report on the october 15th episode i have one more thing. And regular reports on Corporate Bond market. Keep looking at it and i hope that you will look at the volcker rule as potentially another way to look at it, separately capitalize those activities, it takes away the whole argument and doesnt make it as complicated. Yesterday, your ig issued a report that shows with regard to stress tests, there were six problems found in the feds own stress test. If it had been a member bank, they would have required immediate attention. Ive only see media reports on this. I look forward to reading the report on it. In light of these highly critical things in the report, do you plan to undertake any changes that would create more transparency and accountability in the stress testing and ccar process with regard to the fed . As i understand it, the igs findings had to do with our model mainly with our model validation procedures. And those are matters that we certainly will look into and attempt to strengthen. I think we should probably request a more complete review by the ig on all of that. Thank you, mr. Chairman. Time of the gentleman has expired. Chair now recognizes gentleman from missouri, mr. Cleaver, Ranking Member of our housing and insurance subcommittee. Thank you, mr. Chairman. Thank you, Ranking Member. Chairman yellen, i think its been a little over a year ago since Congress Gave you the authority to tailor standards for Insurance Companies, those who would qualify for enhanced supervision. There is, as you know, a great deal of angst, theres maybe even panic on the part of the Insurance Companies over the fact they dont know whats going on, and fear when they come. To the degree you can speak about this publicly, i would present you with that opportunity because it would also help us or help me, as im asked questions over and over and over again from that industry. We know this is a very important matter. We understand that Insurance Companies are different than banks in important ways, in particular the nature of their liabilities is in many cases quite different from that of banking organizations. We appreciate the flexibility that we were given to tailor appropriate rules and were working very hard to get it right. To understand the nature of the business, to consult with the firms, with the insurance, state Insurance Commissioners, with our colleagues and federal insurance office. Were consulting widely and thinking very carefully about what the appropriate regime is. When we have made a set of initial decisions, we will go out with a notice of proposed rulemaking, likely, and ask for comments. So we will go through and open an transparent process in deciding what the appropriate supervision is and allow for comments that we will carefully respond to. I dont want to ask you to give me a date certain, but is the process moving along and yes. People are working very hard. Im sorry, i cant give you a date certain. But this is something that our staff is working on very hard. This is something that our staff is working on very hard. Its a high priority. Similarly, the fed isnt under the interNational Association of prevention supervisor, the iais. These acronyms, weve got to do something about that with the federal government. Especially this committee, mr. Chairman. We need to do something. Your mission is to promote effective global consistent supervision of the insurance industry. We are i think at a point now where maybe its because of the 2008 collapse, everybody is nervous about everything and everybody is afraid that theres a new regulation thats going to come in to cause the world to collapse and allow the mets to win the world series. [ laughter ] im sorry. But, you know, there is no need for this hysteria, is there . Theres no need for hysteria at all. We are, as i said, looking very carefully at our own firms to design an appropriate regime. And by participating in the